Incorporations
Attorney Alternative can assist you with incorporating in California, or in certain other States as well.
The benefits of incorporating are substantial, and include:
• limitation of personal liability for any business debts or judgments,
• potentially favorable tax treatment,
• the ability to set up corporate retirement and profit-sharing plans far superior to those available to an individual
• flexibility of transfer of ownership
• perpetual existence if certain corporate formalities are followed
• limited liability of directors and officers for debts of the corporation
• and more
Below you will find some general information about corporations, partnerships,
LLC’s and the advantages and potential disadvantages of each. Please
consult with your attorney to determine which, if any, of these corporate
structures may be suitable for you.
Then CALL ATTORNEY ALTERNATIVE and we will help you complete all the necessary paperwork to get your corporation off to a flying start!
Advantages of Incorporating
Separate Legal Identity
A corporation is a separate legal entity existing under authority granted
by state law. It has its own identity separate and apart from its shareholders/owners.
Wide-Ranging Powers
As a separate legal entity, a corporation has the power to act in any
way permitted by law and by its own corporate charter. For example, a
corporation can enter into contracts, buy and sell both real and personal
property, sue and be sued, and can even be responsible for breaking the
law (i.e. committing a crime).
Court Appearances
In most jurisdictions, any officer or director or employee can appear
in small claims court on behalf of the corporation. However, in civil
or other courts, and attorney is necessary to represent the corporation,
as the corporation is not allowed to represent itself.
Separate Identity –
Separate Debts
As a separate legal entity, a corporation is responsible for its own debts.
Normally, shareholders, directors, and officers are not responsible for
corporate liabilities. If the corporation suffers losses, the corporation
itself must bear those losses to the extent of its own resources.
Limited Liability of Shareholders
In most cases, the personal assets of the individual shareholders, officers,
directors and employees are not at risk. This is one of, if not the, most
attractive aspects of a corporate business form.
Note however, that shareholders, directors, and/or officers
may be held liable for the debts of the corporation where the court imposes
"alter-ego liability" or where the individual has personally
guaranteed the corporate debt. Consult with your legal counsel for more
information on what constitutes “alter-ego liability” and
how to potentially avoid it.
A Corporation Has Perpetual
Life
A corporation is capable of continuing indefinitely. Its existence is
not affected by the death or incapacity of shareholders, directors, or
officers of the corporation.
Time of Corporation Life
Compared to LLC
An LLC has a limited existence. Absent a contrary agreement, a limited
liability company (LLC) is dissolved upon the death, withdrawal, or bankruptcy
of a member unless the business is continued by unanimous vote of the
remaining members. Although the operating agreement can be drafted to
avoid such a result, the life of the LLC is still limited to a termination
date drafted into the Articles of Organization.
Disadvantages of Incorporating
Corporate Formalities
A California corporation can be created only by compliance
with General Corporation Law of California. This requires filing of Articles
of Incorporation with the Secretary of State, payment of the requisite
state fees and taxes, and completion of the Statement by Domestic Stock
Corporation.
It is mandatory that a corporation have a board of directors,
corporate officers, annual shareholders meetings, and it must maintain
separate books and records.
Compliance with these formalities is SERIOUS! Failure to
properly observe them may result in the personal liability of shareholders
for corporate debts. Where the corporation has only one shareholder, California
allows that one shareholder may act as director and all officers (President,
Secretary, and Treasurer).
In Which State to Incorporate?
State laws governing corporations vary from state to state. However, if
the corporation will have significant business or shareholder contacts
(a.k.a. "presence") within a state, there is usually not much
reason to incorporate outside of that state. For example, forming a California
corporation for a business centered in California is usually the logical
choice for the following reasons:
* Filing Fees: An out-of-state corporation that will be
conducting business in California must "qualify" to do business
in California. This "qualifying" requires the corporation to
pay filing fees to the California Secretary of State in addition to whatever
filing fees were paid in the state of incorporation.
* State Taxes: An out-of-state corporation doing business
in California must register as a “foreign corporation” with
the Secretary of State in order to conduct business in California. As
such, the corporation must pay franchise taxes to California on the business
it conducts in California. The corporation may also have to pay franchise
taxes in its state of incorporation (even if the corporation is not conducting
business in that state). Thus, if all the corporate business is in California,
the corporation will probably pay California State tax on all its earnings,
anyway.
* Securities Laws: The California Corporate Securities Laws
apply to any offer or sale of a security "in this state" regardless
of the issuer’s state of incorporation.
* Corporate Rules: Regardless of where the corporation is
formed, many provisions of the California Corporation Law, for example,
apply if the corporation has a sufficient "presence" in California
* Corporate Operating Formalities: To fully retain the benefits
of incorporating, you must observe corporate formalities, even where the
corporation is operated by a single shareholder / director / officer.
These include conducting regular Board meetings, maintaining accurate
and current corporate books and minutes and conducting the business of
the corporation with good judgment and responsibility.
Corporations: FAQ's
Is my corporate name available?
How long does the incorporation process take?
Why do I need a Registered Agent?
What are Articles of Incorporation?
What are Bylaws?
What is a Corporate Director?
What is a Corporate Officer?
Where can I get a Corporate Seal?
What is a Federal Employer Identification Number?
Does a Corporation have to issue stock?
Should I also file a D.B.A.?
Does incorporating prevent others from using my company
name?
Can I protect a trade name nationwide?
Can the same person be the shareholder, director, and all
officers of a corporation?
What are the differences between a sole proprietorship,
a partnership, an LLC, and a corporation?
Is my Corporate Name available?
Attorney Alternative has an account with the Secretary of State, and we
can check the availability of a corporate name and reserve it for you
immediately if it is available. However, please remember that the final
determination is made by the state officials; thus, never rely on a corporate
name check until AFTER you have received a copy of your filed Articles
of Incorporation, stamped with the state's approval.
Back to FAQ
How long does the process take?
Processing times for incorporating a company vary, and change constantly
depending on the workload at the state office. A current approximation
of the processing time for Articles of Incorporation within California
is 4-8 weeks.
Back to FAQ
Why do I need a Registered Agent?
California requires that the corporation designate a registered agent
for service of process. This is the person who is authorized by the corporation
to accept the service of legal documents on the corporation. The agent
does not necessarily have to be an employee of the corporation, but the
agent must have a street address in California (NO P.O. BOXES)
Back to FAQ
What are Articles of Incorporation?
A Corporation's "Articles of Incorporation" is
the main filing document which begins the corporation's existence under
California law. Once filed, the corporation comes into existence.
California requires that the Articles of incorporation must
contain, at a minimum, information about the Corporate Name, the Registered
Agent, the Corporation's business address, the purpose for which the corporation
is formed, and the number and class of shares of stock that the corporation
is authorized to issue.
Failure to provide the necessary information to the Secretary
of State will result in your Articles being returned to you. You must
then resubmit revised Articles of Incorporation, and the processing time
clock begins all over again.
Back to FAQ
What are Bylaws?
Bylaws serve as the internal operating document for the corporation. Generally,
Bylaws detail the responsibilities, rights, and duties of directors, shareholders
and officers as well as outlining corporate operating procedures and policies.
Currently California does not require that Bylaws be filed; however, the
lack of bylaws in a corporation is not good corporate policy, and may
indicate that the corporation is not following the proper formalities.
Back to FAQ
What is a Corporate Director?
The Board of Directors is essentially the management and
policy-making body for the corporation.
Responsibilities of the Board of Directors include establishing
all business policies and approving major contracts and undertakings.
In addition, the Board may also elect the President. Ordinary business
practices of the corporation are carried out by the Officers and employees
under the directives and supervision of the Directors.
The Directors must act collectively for their votes and decisions
to be valid. That's why Directors may only act at a Board of Directors
meeting. This, however, requires certain formalities. One such formality
is that the Directors must all be notified of a forthcoming meeting in
a prescribed manner, although this can be waived or provided for in the
corporation's Articles of Incorporation or Bylaws.
For a Directors' meeting to be valid, there must also be
a Quorum of Directors present. A Quorum is usually a majority of the Directors
then serving on the Board; however, the Bylaws may specify another minimum
number or percentage.
The Board of Directors must meet on a regular basis
(at least annually.) These are the regular Board meetings. The Board may
also call Special Meetings for matters that may arise between regular
meetings. In addition, boards may call a special shareholders' meeting
by adopting a resolution stating where and when the meeting is to be held
and what business is to be transacted.
The first meeting of the Board of Directors is important
because the Bylaws, the Corporate Seal, Stock Certificates and Record
Books are adopted.
Board members, like officers, have a fiduciary duty to act in the best
interests of the corporation and cannot put their own interests ahead
of the corporation's.
The Board must also act prudently and not negligently
in the management of the affairs of the corporation. Finally, the Board
must make certain that it properly exercises its authority in managing
the corporation and does not breach or shirk its responsibilities to others.
This means that the board must be very careful to document
that each Board action was reasonable, lawful and in the best interests
of the corporation. This is particularly true with matters involving compensation,
dividends and dealings involving Officers, Directors and Stockholders.
The record or Corporate Minutes of the meeting must include the arguments
or statements to support the Board action and must detail why the action
was proper.
Back to FAQ
What is a Corporate Officer?
A corporate officer is a person empowered by the Board of Directors to
operate and manage the day-to-day affairs of the corporation. As corporate
officer must be a natural person, and cannot be another corporation, business,
trust, or other legal entity. California currently allows the same person
to act in all capacities, and that person has different responsibilities
depending on the capacity in which he or she is acting.
* President
* Vice President
* Treasurer
* Secretary (or clerk)
* Assistant Secretary
* Assistant Treasurer
The President is generally appointed by the Board of Directors, is directly
responsible for carrying out the Board’s orders, and serves at their
pleasure (meaning the Board can fire the President if they so choose!)
The President is typically responsible for entering into contracts on
behalf of the corporation, overseeing the employee workforce, managing
the duties of the other corporate employees, and delegating corporate
authority to other officers as the President directs.
The Treasurer is usually also the chief financial officer of the corporation
and is responsible for controlling and recording its finances and maintaining
corporate bank accounts. Actual fiscal policy of the corporation generally
rests with the Board of Directors and can be largely controlled by the
president on a day-to-day basis.
The Secretary is responsible for observing corporate formalities and maintaining corporate records.
In addition to these required officer positions, a corporation
may also have vice presidents and/or assistant secretaries or assistant
treasurers.
Typically, the authority and responsibilities of each officer is described
in the corporate bylaws and may be further defined by an employment contract
or job description.
Back to FAQ
Where can I get a Corporate Seal?
Although California no longer has the requirement of maintaining a corporate
seal, many corporations still choose to obtain one as a formality. If
you decide you would like to have one, Attorney Alternative can arrange
to have one made for you. The cost for a Corporate Package, including
steel embosser, a nicely-bound corporate minutes book, and printed stock
certificates is around $120.00
Back to FAQ
What is a Federal Employer Identification Number?
You will almost certainly be opening a bank account under your corporate
name. To open a corporate account, most banks will require that your corporation
have a Federal Employers Identification Number.
A Federal Tax Identification Number (also known as a “Tax ID”
or an "EIN Number" ) is a number assigned to a corporation or
L.L.C. by the IRS for purposes of taxation identification. The Federal
Tax ID Number is to a corporation or L.L.C. as a Social Security Number
is to an individual. Attorney Alternative can prepare your Federal Tax
Identification Number Application (IRS Form SS4) and obtain your Tax ID
number promptly.
Back to FAQ
Does the corporation have to issue stock?
Yes. Shares of stock represent ownership of the corporation. Where no
shares are issued, no individual owns the corporation. Thus, shares must
be issued to those individuals who will own the corporation.
California requires that you file a Notice of Intent to Issue Stock (Form
25102(f)) when the Board decides to whom and in what quantity your corporation
will be issuing shares.
Since issuance of stock is a legal matter, for help regarding your corporation's
stock issuance, please contact your attorney or the California Department
of Corporations.
Back to FAQ
Should I also file a D.B.A. ('Doing Business
As')?
If corporations desire to do business under a name that is different than
the name set forth in their organizational documents, they must file certificates
in the counties where the registered office and the principal office are
located (if different), and must also file with the secretary of state
that they are “doing business as” (dba) a name different than
that under which they were incorporated.
Back to FAQ
Does incorporating prevent others from using
my company name?
Incorporating will not keep another business from using your name. Generally,
every business must protect its own business name and the good will that
it has acquired from the sale of its goods or services in a specific geographic
area.
Filing articles of incorporation only prevents the Secretary of State
from filing a document to create another corporation, limited liability
company or limited partnership that has the same, a deceptively similar,
or similar name as the entity already in existence.
Back to FAQ
Can I protect my trade name?
There is currently no national registration of trade names. Generally,
businesses, including corporations, protect their trade names by registering
their trade name as a service mark or trademark if the trade name also
functions as a service mark or trademark.
While Attorney Alternative can assist you in obtaining a trade name for
a corporation doing business in California, because of the legal complexities
involved, we recommend that businesses obtain private counsel to get advice
on how to protect a trade name in interstate commerce.
Back to FAQ
Can the same person be the shareholder,
director and all officers of a corporation?
California requires that there be at least one director and two officers
in a general, for-profit corporation. The required officers are President
and Secretary. California does, however, allow one natural person to hold
both offices and be the sole director of the corporation. Usually, that
one person may also be the sole shareholder. It is a good idea to consult
with your attorney if you have any questions regarding the legality of
your proposed corporate structure.
Back to FAQ
What are the differences between a sole
proprietorship, a partnership, an LLC, and a corporation?
Corporations are formed pursuant to state law and have shareholders,
are managed by a board of directors, and the daily affairs are administered
by officers. A limited liability company (LLC) has members and may be
managed by one or more managers. Most often, both entities must pay franchise
taxes, but may have different federal tax liabilities.
Generally, most people form corporations or limited liability
companies in order to shield the shareholders or members and officers
or managers from personal liability for the debts and obligations of the
entity. There may also be various tax advantages to forming these entities
which may not be available for sole proprietorships and general partnerships.
Click below for information on:
Sole Proprietorship
General Partnership
Limited Liability Company ("LLC")
Corporations (C-Corporations)
S Corporation
Sole Proprietorship
In General: This is the simplest form of business. A sole proprietorship
is not a separate entity itself. Rather, a sole proprietor directly owns
the business and is directly responsible for its debts.
Unlimited Personal Liability for Loss: In a sole proprietorship,
the owner is personally liable for the company, thus placing his or her
entire personal assets and wealth at risk. If an owner is married, that
owner puts the community property at risk as well.
Management and Control: The owner (sole proprietor) has total management
and control over the company. However, the price for total management
and control is that the owner is at risk for personal liability incurred
through the acts of the owner’s agents or employees.
No Formalities: With the exception of complying with any applicable
licensing requirements, there are generally no formalities required of
a sole proprietorship. Note, however, where the business is conducted
under a name which does not show the owner’s surname or implies
the existence of additional owners, California requires that the owner
file a fictitious business name statement (“dba”) and publish
notice.
Transferability: The owner can sell the business as he or she pleases.
Duration: The sole proprietorship remains in existence for as long
as the owner is willing or able to stay in business.
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General Partnership
In General: A form of business entity in which 2 or more co-owners
engage in business for profit. For the most part, the partners own the
business assets together and are personally liable for business debts.
Sharing Profits: In the absence of a partnership agreement, profits
are shared equally amongst the partners. A partnership agreement, however,
will usually provide for the manner in which profits and losses are to
be shared. California currently has no requirement that a formal partnership
agreement be drafted and filed. However, it is a good idea to put your
Partnership Agreement in writing to be sure each partner understands his
or her duties, responsibilities and liabilities, to help avoid disputes
over the agreement, and to ensure that all partners agree on the terms
and conditions of the partnership agreement.
Unlimited Personal Liability for Losses: Each Partner is, jointly
and severally, personally liable for debts and taxes of the partnership.
For example, if the partnership assets are insufficient to satisfy a creditor’s
claims, the partners’ personal assets are subject to attachment
and liquidation to pay the business debts.
Liability for a Co-partner’s debts: Each general partner
is deemed the agent of the partnership. Therefore, if that partner was
apparently carrying on partnership business, all general partners can
he held liable for his dealings with third persons. There are exceptions
to this rule, but generally the actions of one can be imputed and charged
to all of the partners if that person was acting on behalf of the partnership.
Liability for a co-partner’s wrongdoing: Each partner may
be held jointly and severally liable for a co-partner’s wrongdoing
or tortious act (e.g. the misapplication of another person’s money
or property.
Duration: Technically, a partnership terminates upon the death,
disability, or withdrawal of any one partner. However, most formal partnership
agreements provide for these types of events with remaining partners in
the partnership having first right of refusal to purchase the share of
the departed partner.
Management and Control: In the absence of a partnership agreement,
each general partner has an equal right to participate in the management
and control of the business. Disagreements in the ordinary course of partnership
business are decided by a majority of the partners. Disagreements of extraordinary
matters and amendments to the partnership agreement require the consent
of all partners.
Transferability: Unless otherwise provided in the partnership agreement,
no one can become a member of the partnership without the consent of all
partners. However, a partner may assign his share of the profits and losses
and right to receive distributions ("transferable interest").
Further a partner’s judgment creditor may obtain an order charging
the partner’s "transferable interest" to satisfy a judgment.
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Limited Liability Company (“LLC”)
In General: An LLC is a hybrid between a partnership and a corporation
in that it combines the "pass-through" treatment of profits
and losses of a partnership with the limited liability accorded to corporate
shareholders.
Two members required: Unlike a corporation which can have as few as one
shareholder, California requires that an LLC consist of two or more members
(owners). Recently, however, some states are allowing single-member LLCs.
Check with your attorney to determine what the current state of the law
is regarding this issue in California.
Separate Legal Entity: Like limited partnerships and corporations,
an LLC is recognized as a separate legal entity from its "members."
Limited Liability: Ordinarily, only the LLC is responsible for
the company's debts thus shielding the members from individual liability.
However, there are some exceptions where
individual members may be held liable:
Guarantor Liability: Where an LLC member has personally guaranteed
the obligations of the LLC, he or she will be liable. For example, where
an LLC is relatively new and has no credit history, a prospective landlord
about to lease office space to the LLC will most likely require a personal
guarantee from the LLC members before executing such a lease.
“Alter Ego” Liability: Similar to a corporation, a
court may hold the individual shareholders liable where the business entity
is merely the "Alter Ego" of its shareholders. As such, a member
of an LLC may also be held liable for the LLC’s debts if the court
determines that the LLC is merely the “alter-ego” of its members
and not a separate legal entity.
Please note, however, that although a corporation's failure
to hold shareholder or director meetings may subject the corporation to
alter ego liability, this is not the case for LLCs in California. An LLC's
failure to hold meetings of members or managers is not usually considered
grounds for imposing the alter ego doctrine where the LLC's Articles of
Organization or Operating Agreement do not expressly require such meetings.
Management and Control: Management and control of an LLC is vested
with its members unless the articles of organization provide otherwise.
Voting Interest: Ordinarily, voting interest directly corresponds
to interest in profits, unless the articles of organization or operating
agreement provide otherwise.
Transferability: No one can become a member of an LLC (either by
transfer of an existing membership or the issuance of a new one) without
the consent of members having a majority in interest (excluding the person
acquiring the membership interest) unless the articles of organization
provide otherwise.
Duration: Although many states now allow an LLC to have a perpetual
existence, LLC's traditionally were required to specify the date on which
the LLC's existence will terminate. In most cases, unless otherwise provided
in the articles of organization or a written operating agreement, an LLC
is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy
of a member (unless within 90 days a majority in both the profits and
capital interests vote to continue the LLC).
Formalities: The existence of an LLC begins upon the filing of
the Articles of Organization with the Secretary of State. The articles
must be on the form prescribed by the Secretary of State. Among the required
information on the form is the latest date at which the LLC is to dissolve
and a statement as to whether the LLC will be managed by one manager,
more than one manager, or the members.
To validly complete the formation of the LLC, members must
enter into an Operating Agreement. This Operating Agreement may come into
existence either before or after the filing of the Articles of Organization
and may be either oral or in writing.
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Corporations (C-Corporations)
In General: The “C” designation refers to the applicable
Internal Revenue Code section governing the taxation of this type of corporation.
Without making an election to change the corporate tax status (See “S-Corporation”
discussed below) this is the default type of corporation that will be
formed in California. To be formed, an Incorporator must file Articles
of Incorporation and pay the requisite state fees and prepaid taxes with
the appropriate state agency (usually, the Secretary of State).
Separate Legal and Tax Life: A corporation which is properly
formed and operated as a corporation assumes a separate legal and tax
life distinct from its shareholders. A corporation pays taxes at its own
corporate income tax rates and files its own corporate tax forms each
year.
Management and Control in Corporations: Normally, a corporation's
management and control is vested in the board of directors who are elected
by the shareholders of the corporation. Directors generally make policy
and major decisions regarding the corporation but do not individually
represent the corporation in dealing with third persons. Rather, dealings
with third persons are conducted through officers and employees of the
corporation to whom authority is delegated by the directors of the corporation.
Shareholders: Shareholders are the owners of a corporation.
Board of Directors: The Board of Directors is responsible
for the Management and policy decisions of the corporation.
Corporate Officers: Corporate officers are elected by the Board
of Directors and are responsible for conducting the day-to-day operational
activities of the corporation. Corporate officers usually consist of the
following: (President, Vice-President, Secretary, Treasurer).
Number of Persons Required: In California, one or more persons
may form and operate a corporation.
Fringe Benefits: Corporations may often offer their employees unique
fringe benefits. For example, owner-employees may often deduct health
insurance premiums paid by the corporation from corporate income. In addition,
corporate defined - benefit plans often afford better retirement options
and benefits than those offered by non-corporate plans.
Corporate Formalities: To retain the corporate existence and thus
the benefits of limited liability and special tax treatment, those who
run the corporation must observe corporate formalities. Thus, even a one-person
corporation must wear different hats depending on the occasion.
For example, one person may be responsible for being the sole shareholder, Director, and Officer of the corporation; however, depending on the action taken, that person must observe certain formalities: Annual meetings must be held, corporate minutes of the meetings must be taken, Officers must be appointed, and shares must be issued to shareholders.
Most importantly, however, the corporation should issue
stock to its shareholders and keep adequate capitalization on hand to
cover any "foreseeable" business debts.
Shareholder Liability for Corporate Debts: Where corporate formalities
are not observed, shareholders may be held personally liable for corporate
debts. Thus, if a thinly capitalized corporation is created, funds are
commingled with employees and officers, stock is never issued, meetings
are never held, or other corporate formalities required by California
are not followed, a court or the IRS may "pierce the corporate veil"
and hold the shareholders personally liable for corporate debts.
Avoiding Double Taxation: Generally, the corporation is taxed for
its own profits; then, any profits paid out in the form of dividends are
taxed again to the recipient as dividend income and the individual shareholder's
tax rate. However, most small corporations rarely pay dividends.
Rather, owner-employees are paid salaries and fringe benefits
that are deductible to the corporation. The result is that only the employee-owners
end up paying any income taxes on this business income and double taxation
rarely occurs.
Duration of a Corporation: As a separate legal entity, a corporation
is capable of continuing indefinitely. Its existence is not affected by
death or incapacity of its shareholders, officers , or directors or by
transfer of its shares from one person to another.
S Corporation
What is an S Corporation: An S Corporation begins its existence
as a general, for-profit corporation upon filing the Articles of Incorporation
at the state level. A general for-profit corporation (also known as a
'C corporation') is required to pay income tax on taxable income generated
by the corporation.
However, after the corporation has been formed, it may elect "S Corporation
Status" by submitting IRS form 2553 to the Internal Revenue Service.
Once this filing is complete, the corporation is taxed like a partnership
or sole proprietorship rather than as a separate entity. Thus, the profits
and losses are "passed-through" to the shareholders for tax
purposes. Therefore, a shareholder's individual tax returns will report
the income or loss generated by an S corporation.
Qualifying for S Corporation Status: To qualify as an S corporation,
a corporation must timely file IRS Form 2553 with the IRS. This election
must be made by March 15 if the corporation is a Calendar year taxpayer
in order for the election to take effect for the current tax year. However,
a "new" corporation may make the filing at anytime during its
tax year so long as the filing is made no later than 75 days after the
corporation has began conducting business as a corporation, acquired assets,
or has issued stock to shareholders (whichever is earlier).
To qualify for S corporation status, the corporation must be a U.S. corporation
with only one class of stock. In addition, the corporation cannot have
more than 75 shareholders. Further, shareholders must be individuals,
estates or certain qualified trusts, who consent in writing to the S corporation
election. No shareholder can be non-resident alien.
Corporate Formalities: An S-Corporation follows the same state
formalities as does a C-corporation (i.e. filing Articles of Incorporation
and paying state fees). However, an S-Corporation must make a special
tax election under sub-chapter S of the Internal Revenue Code by filing
IRS Form 2553.
IRS Filing: The S-Corporation must complete and file the appropriate
IRS Forms to report its annual income to the IRS each year.
General Shareholder Requirements: ALL shareholders of the corporation
must be U.S. Citizens or have U.S. Residency Status. If, for any reason,
shares are somehow sold or transferred (even if by will, divorce, or other
means) to a shareholder who is a foreign national, the corporation will
lose its S-Corporation status and be treated as a C-Corporation. In addition,
the corporation may never have more than 75 Shareholders.
Only One Class of Stock: S-Corporations may have only one class
of stock.
Losing S-Corporation Status: An S-Corporation that loses its status
as such may not re-elect S-Corporation status for a minimum of five years.
Who Should Elect S-Corporation Status: Owners who want the limited
liability of a corporation and the "pass-through" tax-treatment
of a partnership will often make the S-Corporation election.
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